In considering the cost approach, remember that the cost of something does not necessarily
determine its selling price. This is true in a rapidly changing market, which is
highly affected by technological changes or variances in supply and demand. This
is especially true if a company is very young and has not yet established enough
of a track record to make a confident analysis of the future performance.

Also, in the case of a Business, all serious practitioners of Business Appraisal
agree that book value is not necessarily an adequate proxy for representing the underlying
net asset value of a Business for Appraisal purposes, much less for representing
the value of the Business itself. However, book value is a figure that is available
for almost all Businesses. Furthermore, it is a value that different Businesses
have arrived at by some more or less common set of rules, usually some variation
within the scope of generally accepted accounting elements (GAAP). Also, each asset
or liability number that is a component of book value as shown in the financial statements
represents a specific set of obligations that can be identified in detail by referring
to the company’s records, assuming that the bookkeeping is complete and accurate.
Therefore, book value usually provides the most convenient starting point for an
asset value approach to the Appraisal of a Business interest.

The nature and extent of adjustments that should be made to book value for the Business
Appraisal depend on many factors. One, of course, is the purpose for the Appraisal.
Another, which is frequently a limiting factor, is the availability of reliable
data on which to base the adjustments both for the subject company and for other
companies which might be compared in the course of the Appraisal.

One concept for fixed assets is value of use, the value of the operating assets to
the owner/user, or buyer who will use it in a similar manner. Value in use is the
value that includes consideration for the unique relationship of the item to a particular
Business such as the subject. There is a value for an item, which is already in
place and is ready to use in a going Business. The value might be the item’s retail
price, plus applicable taxes, freight, and installation charges. The summation of
these costs, after proper deductions for depreciation and obsolescence, is the value
in use of that item. This value may be different from its fair market value to a
buyer who may not use the equipment at its present location. A definition for value
in use is as follows:

The value of an economic good to its owner/user is based on the production

privacies in income; utility or amenity form) of the economic good to a specific

individual. This is a subjective value, however, and may not necessarily

represent the market value.

The Appraiser, therefore, will have to subjectively estimate the value in use of
the subject’s assets based on past experience with assets of a similar nature.